Dollar Falls Again Amid Growing U.S. Fears

Dollar falls again amid growing US fears

http://business.guardian.co.uk/story/0,,2124083,00.html

· Wall Street threatened by crumbling housing market
· Pound hits its highest value in 26 years

Larry Elliott and Andrew Clark
Thursday July 12, 2007
The Guardian

The dollar remained under strong pressure on the foreign exchange markets last night as fresh concerns were raised about the vulnerability of Wall Street to the crumbling American housing market.

With the pound trading at its highest level against the dollar since 1981, the credit rating agency Moody's said it had placed a new $6bn (£3bn) tranche of securities backed by US mortgages under review for a possible downgrade. The move followed separate announcements by Moody's and a rival ratings agency, Standard & Poor's, on Tuesday, that put $17bn of sub-prime mortgage-backed securities on credit watch, adding to growing concerns about the health of the world's biggest economy.

Sterling hit a 26-year high of $2.0363 against the US currency at one point in London trading yesterday before dropping back to $2.0322. Nick Parsons, head of markets strategy at nabCapital, said the dollar, which hit a record low of $1.3787 against the euro, was likely to fall further. "The economic brakes in the US have been slammed on in a massive, massive way," Mr Parsons said, adding that he expected US retail sales figures tomorrow to be weak. The impact on consumer spending from falling house prices was being compounded by credit becoming scarcer and more expensive, he said.

This week's turmoil on Wall Street and the signs that the housing market remains in decline will increase pressure on Ben Bernanke, chairman of the US Federal Reserve, to signal a willingness to cut interest rates later this year. Wall Street's financial institutions and pension funds are thought to be heavily exposed to possible losses in collateralised debt obligations (CDOs) - packages of debt including mortgages owed by American households that are bought and sold in the financial markets.

After booming in the low interest-rate environment from 2003 to 2005, the past two years have seen a savage retrenchment in the US real estate market, with fewer homes being built, prices falling and a sharp increase in mortgage arrears and repossessions. Fears that the highly complex financial instruments might be worth far less than previously expected has triggered the threat of downgrades from the credit agencies. "The ratings agencies are far behind the curve in adjusting to the reality of a rapidly deflating property market", said Graham Turner of GFC Economics. "Indeed these bonds represent a fraction of the residential mortgage-backed securities (RBMS) at risk."

Although the National Association of Realtors warned yesterday that US home sales and prices would fall further in 2007 than earlier expected, there were no signs from the central bank - the Fed - that it intends to ease policy. Charles Plosser, president of the Philadelphia federal reserve bank, said the downturn in the housing market had not changed forecasts for economic growth to return to trend by the end of the year.

"The recent reversal of the boom in housing activity and house prices has contributed to a slowdown in economic growth," he told an economic forum in London. "But the consequences of the declines in housing activity and house prices, in my view, have so far not derailed the prospect that economic growth will return toward trend at the end of 2007 and in 2008". The weakness of the dollar has become so severe that it is almost at the same level of its counterpart north of the 49th parallel. Canada's so-called "loonie", nicknamed after a bird called the common loon depicted on dollar coins, reached 95.74 US cents on Monday - its highest point for 30 years.

Soaring prices for agricultural produce, metals and minerals have bolstered the economy north of the 49th parallel, together with a fiscal tightening by Canada's central bank. Canada's currency has appreciated by 45% against the US dollar over five years. Monday's rate was the highest since March 1977.